Oil contracts for delivery in three to five years’ time are trading at their biggest ever discount to spot prices, prompting a debate about whether the era of triple-digit oil prices will be a short-term phenomenon.
Spot oil prices have rallied nearly $20 since the start of the year and traded above $125 a barrel yesterday, on the back of supply disruptions and geopolitical fears over Iran.
Over the same period, oil for delivery in December 2018 has risen $1 to about $95. This has opened a record gap of more than $30 between spot and five-year contracts. “The market has the perception that oil supply will increase in the future and that is holding back the price of forward contracts,” said Mark Thomas, head of energy futures at commodities brokerage Marex Spectron, citing expectations of higher output in Iraq, Brazil, the US and Canada.
Saudi Arabia, the world’s largest producer of oil, has also pointed to higher supplies emanating from these countries for its belief that current oil prices are “unjustified”. US oil production has surged to a 10-year peak after companies tapped so-called shale reservoirs, using a technique called hydraulic fracturing or “fracking”.
Energy bankers and analysts believe that forward selling by US companies tapping into the shale revolution has contributed to low future prices. The collapse in natural gas prices has forced some producers to start hedging their production, even if they are bullish about oil prices, to ensure debts repayment.
But many in the industry remain sceptical about a future supply surge. “In our view, oil prices will be significantly higher in the coming years than those implied by the forward curve,” said Paul Horsnell, head of commodities research at Barclays. Mr Horsnell previously predicted the sustained surge in prices through $100 a barrel.
The International Energy Agency, the western countries’ oil watchdog, also warned last year that increased oil production in the US was “unlikely to affect the dynamics of global oil supply significantly”.
The price difference extends to other forward contracts. The spread between the contracts for immediate delivery and the three-year forward has risen to roughly $25 a barrel, the biggest since at least 1998, according to Bloomberg data.
While the oil price rally partly reflects a tight physical market, the difference between spot and forward prices is bigger than in previous tight markets, such as 2008 and 2004.